Guidance

Agricultural flat rate scheme (VAT Notice 700/46)

Find out who can use, and how to apply to join the agricultural flat rate scheme.

Detail

This notice cancels and replaces Notice 700/46 (April 2011).

1. Overview

1.1 What this notice is about

It explains the agricultural flat rate scheme, who can use it and how to apply to join.

1.2 What’s changed from the previous version

This revised notice replaces the April 2011 edition and includes an example of the VAT 98 - Flat Rate Scheme for agriculture, application for certification.

1.3 Force of law

Section 10 contains an example of the VAT 98 form which carries the force of law under the VAT Regulations 1995, Regulation 204(c).

1.4 Who the flat rate scheme is for

The flat rate scheme is an alternative to VAT registration for farmers.

If you register as a flat rate farmer you do not account for VAT or submit returns and so cannot reclaim input tax. But you can charge and keep a flat rate addition (FRA) when you sell goods or goods and services to VAT registered customers. You cannot join the scheme if the value of your non-farming activities is above the VAT registration threshold.

The flat rate addition is not VAT but acts as compensation for losing input tax on purchases. It is not intended as reimbursement for all the VAT incurred on purchases. The flat rate addition is 4%.

1.5 Definition of a farmer

For the purposes of this scheme only, the definition of a farmer is someone who carries on any of the agricultural production activities or agricultural production activities and services listed in Section 3.

Although the term ‘farmer’ is used throughout this notice, there are a number of activities, such as horticulture, which are not usually called farming but are covered by the scheme. Section 3 will help you decide if the scheme covers your activities.

1.6 Rules for joining the scheme

To join you must:

(a) be in business as a farmer supplying goods, or goods and services (but not services alone), which qualify for inclusion in the scheme, for details of these see Section 3.

(b) cancel your VAT registration, if you are currently registered. You can only do this if your turnover for non-farming goods and services is below the VAT registration threshold.

(c) in the 3 years before your application not have been convicted of any offence in connection with VAT or have been penalised for any kind of VAT offence under Section 152 of the Customs and Excise Management Act 1979, or been assessed to a penalty under Section 60 of the VAT Act 1994.

1.7 Who can’t join the scheme

You can’t join the scheme if:

  • your primary activity is to buy and sell animals, for example, if you deal in, or train, animals
  • you’re engaged in an activity once removed from farming for example, if you process farm produce, examples include dairy co-operatives who buy milk from farmers and produce dairy products, and sawmills
  • your turnover for non-farming activities exceeds the registration threshold for example, if you let holiday cottages

1.8 Already registered for VAT

You can choose to remain registered for VAT if you wish. Even if you qualify, you don’t have to join the scheme.

1.9 The law that covers this scheme

The scheme is covered in UK law in VAT Act 1994, section 54 and VAT Regulations 1995, regulations 202-211. The VAT (Flat Rate Scheme for Farmers) Designated Activities Order 1992 details those activities covered.

2. How and when to notify HMRC that you’re joining the scheme

2.1 Forms you must complete

You should complete application form VAT 98 Flat Rate Scheme for Agriculture.

When HMRC get your application, we’ll:

  • send you a certificate to confirm when your membership starts
  • give reasons why, if your application has been rejected

2.2 When to apply to join the scheme

You can apply at any time, but your certificate will only take effect from the date we get your application. To make sure you’re registered by your preferred date, you can apply up to 30 days in advance, so you can be certain when your certificate will start. If you’re VAT registered, your certificate will not take effect from a date before your registration is cancelled. Allow up to 3 weeks for a certificate to be issued.

2.3 What your certificate will show

If you’re a sole proprietor or company, your certificate will show the full name of the business owner and address of the business.

If you’re a partnership, your certificate will show the trading name of the business (if there is one) or names of at least two partners.

In either case, the certificate covers all partners who were named on the application form and any accompanying list.

3. Farming activities that qualify for the scheme

3.1 Which activities qualify

Activities You can normally join the scheme if you are involved in any of the following
Crop production general agriculture, including viticulture, growing of fruit and of vegetables, flowers and ornamental plants, whether in the open or under glass, production of mushrooms, spices, seeds and propagating materials, or nurseries, this covers the rearing of young plants for sale.
Stock farming general stock farming, poultry farming, rabbit farming, beekeeping, silkworm farming, or snail farming.
Forestry growing, felling and general husbandry of trees in a forest, wood or copse including the conversion of felled timber into sawlogs, industrial small diameter roundwood, pitprops, cordwood, fencing material and firewood.
Fisheries fresh-water fishing, fish farming, breeding of mussels, oysters and other molluscs and crustaceans, or frog farming.

3.2 Types of processing that qualify for the scheme

Those types of processing where you’ve grown the products that are being processed qualify.

An example would be if you grow trees, fell them and process the timber, perhaps by cutting it into logs. But not if you are processing timber that someone else has grown.

3.3 Services that qualify for the scheme

The following services qualify, if they’re linked to one of the activities listed at paragraph 3.1:

  • field work, reaping and mowing, threshing, bailing, collecting, harvesting, sowing and planting
  • packing and preparing for market (including drying, cleaning, grinding, disinfecting and ensilaging) of agricultural products for market
  • storage of agricultural products
  • stock minding, rearing and fattening
  • hiring out of equipment for use in any of the activities described in this list
  • technical assistance in relation to any of the activities described in this list
  • destruction of weeds and pests, dusting and spraying of crops and land
  • operation of irrigation and drainage equipment
  • lopping, tree felling and other forestry services

3.4 Activities that fall outside of the scheme

Type of activity You cannot join the scheme if
Crop production you are a marketing co-operative or selling peat or top soil.
Stock farming you are raising budgerigars and other birds in aviaries purely as pets, raising butterflies and any other animals or birds raised for similar purposes, for example cats and dogs (except sheep dogs) providing most other activities involving animals, for example pony trekking, riding lessons, hunting and so on - training animals as a specialist activity, training horses bred for racing and any specialist training of horses for show-jumping or eventing, or training pigeons for racing (however, the breeding, rearing and care of pigeons would fall within the scheme)
Forestry the activity involves any processing beyond the conversion of felled timber into sawlogs, industrial small diameter roundwood, pitprops, cordwood, fencing material and firewood.
Services the services concern the sale or leasing of milk quotas. Even if they are sold with land, these services are not considered a qualifying activity under the flat rate scheme.

4. Non-farming activities

4.1 Where non-farming turnover is below the VAT registration threshold

If the level of your taxable turnover of your non-farming business activities is less than the VAT registration threshold, you can still be a flat rate farmer. Non-farming activities include things like the provision of bed and breakfast or holiday accommodation, charges to visit the farm, riding lessons.

4.2 Where non-farming turnover is above the VAT registration threshold

If you’re already a flat rate farmer and your non-farming turnover goes over the threshold you must leave the scheme and register for VAT. But, you should also read paragraph 4.4. If your non-farming turnover is above the threshold and you’re already registered for VAT you must remain so.

4.3 Charging VAT on non-farming activities

If you’re not VAT registered, you can’t charge VAT on your non-farming activities, such as bed and breakfast. You can’t charge the flat rate addition on these supplies either.

4.4 Registering the non-farming side of your business separately

If it’s run as a separate business and it’s run by someone not granted a flat rate certificate, you can register the non-farming side of your business separately.

For example, if you have a flat rate farming certificate as a sole proprietor, you can register for VAT as a partnership or limited company, as long as the partnership or company owns the non-farming business.

You can’t reclaim VAT through the registered partnership or limited company, on expenses you incur on your farm activities.

4.5 Buying items that are used for both farming and non-farming activities

If you buy machinery or equipment which has a dual purpose and is for legitimate use in both businesses, you may reclaim on your VAT return only the proportion of VAT proper to the use of that equipment in your VAT registered business.

4.6 If HMRC refuse your application

We can refuse if your non-farming activities are over the VAT threshold.

We can also refuse if you’d recover substantially more money through the flat rate scheme than the input tax you claim through VAT registration This might happen because your input tax, when compared to your sales, is a much smaller percentage than the flat rate addition. But your application on these grounds will only be refused if the amount you stand to gain is more than £3,000 in the year following your application. This is calculated by comparing the flat rate addition that you would be able to charge, with the input tax you would normally be able to reclaim.

4.7 Appealing if your application is refused

Find out about reviews and appeals.

You can also find out more about tribunals and get the relevant forms.

5. Accounting procedures under the scheme

5.1 Charging VAT if you join the flat rate scheme

You can’t charge VAT but you can add the flat rate addition of 4% to the sale price of qualifying goods or goods and services sold to VAT registered customers even where these sales would be zero-rated for VAT. This is because the flat rate addition is not a VAT rate or amount.

5.2 Adding the flat rate addition to sales

You don’t have to add the flat rate addition to your sales, but when you do, you may keep it. However, you must not charge the flat rate addition on sales of:

  • machinery
  • land, and the repair and maintenance of farm buildings belonging to other farmers

And you must not charge the flat rate addition on sales to:

  • people who are not registered for VAT
  • other flat rate farmers

This is because they are unable to reclaim the addition.

5.3 VAT returns and paying the flat rate addition to HMRC

If you’re using the scheme, you don’t have to complete any VAT returns or pay anything to HMRC.

5.4 Issuing invoices

You must issue invoices if you charge the flat rate addition on your qualifying goods and services to your VAT registered customers. They will need invoices to claim back the addition on their VAT return.

Invoices must show:

  • an identifying invoice number
  • your flat rate certificate number
  • your name and address
  • the name and address of your VAT registered customer
  • the date of the sale
  • a description of the goods or services
  • the price payable excluding the flat rate addition
  • the rate and amount of the FRA

Your customer can prepare an invoice for you provided the arrangements meet the legal conditions laid down in the VAT regulations and in Notice 700/62 Self-Billing.

5.5 VAT on equipment on hand on joining the scheme

If you cancel your VAT registration to join the scheme, you will not have to pay VAT on the value of any stocks and assets of your business.

5.6 Records you must keep

If you become a flat rate farmer, you must keep your normal business records and copies of all invoices where the flat rate addition is shown for 6 years.

5.7 Visits from HMRC officers

Generally our officers will not visit you but, exceptionally, an officer may ask to see your records. If this happens you must make them available.

5.8 Treatment of flat rate additions by your customers

Your VAT registered customers will be able to reclaim flat rate additions on their VAT returns if the goods or services you sell them are for business use. They treat the addition as input tax. If a customer claims an unauthorised amount, for example an amount charged on goods which are not agricultural produce, we will disallow it. The customer may then have to pay a financial penalty.

6. Imports and exports

6.1 Selling to other EU Member States

No VAT is due when agricultural produce is sent or taken to a VAT registered person in another EU Member State but if you, as a UK flat rate farmer, sell agricultural produce to a VAT registered person in another EU Member State, you will be able to charge the flat rate addition. Your VAT registered customers in other EU Member States can reclaim the flat rate addition you have charged. You will need to issue them with a flat rate invoice so that they can do this. Paragraph 5.4 tells you the details you will need to include on the invoice.

6.2 Buying from other EU Member States

If you are registered for VAT in the UK and you buy goods from suppliers in other EU Member State, on which a flat rate addition has been charged, you can reclaim this amount from the tax authority in the supplier’s Member State.

As a UK flat rate farmer acquiring goods, other than new means of transport, from other EU Member States, if those acquisitions reach the current VAT registration threshold in a calendar year, you may have to register for VAT and leave the flat rate scheme. If you think this affects you, please ask the VAT Registration Service for advice.

Special arrangements apply to new means of transport. Notice 728 VAT: new means of transport movements by private persons will give you the details.

6.3 If you make sales to customers outside the EU

As a flat rate farmer you will be able to charge the flat rate addition when you sell agricultural produce to customers outside the EU, provided the produce is for the customer’s business.

7. Leaving and rejoining the flat rate scheme

7.1 When membership of the scheme ends

You can leave the scheme voluntarily, or HMRC can remove you compulsorily if you no longer qualify for the scheme.

To leave voluntarily, you must have been in the scheme for at least a year. If you meet this condition, you must apply in writing to the VAT Registration Service.

7.2 When to leave the scheme

You must leave the scheme if you:

  • become liable to be registered for VAT as a result of your non-farming supplies going over the threshold
  • cease to produce agricultural goods qualifying for the flat rate scheme
  • cease to qualify as a flat rate farmer because you sell your business or ownership of the business changes from sole proprietor to limited company, in which case you can apply for a new certificate
  • become insolvent or otherwise incapacitated
  • are found to be recovering substantially more as a flat rate farmer than you would if you were registered for VAT in the normal way

7.3 When can HMRC can remove you compulsorily from the scheme

Some of the circumstances where we may cancel your certificate include where:

  • it is discovered that you made a false statement on your application
  • you have received a penalty for VAT evasion or been convicted of an offence in connection with VAT
  • you cease to be involved in designated activities
  • you die, or become bankrupt or incapacitated
  • you become liable to be registered under the VAT Act 1994, Schedules 1,1A or 3
  • you make an application in writing for registration under Schedule 1, 1A or 3 to the Act, which shall be seen as an application for cancellation of your certificate
  • they consider it is necessary to do so for the protection of the revenue

7.4 Rejoining the scheme

If you have registered for VAT since leaving the scheme, you can only rejoin the scheme if at least:

  • 3 years have passed since you left the scheme
  • 1 year has passed since you left the scheme, and at the time you apply to rejoin, the tax due on your assets on hand is less than £1,000

If you have not registered for VAT since leaving the scheme, and were not required to be registered, you may rejoin the scheme at any time.

8. Special cases

8.1 Produce sold through farmers’ groups and co-operatives

If you are selling produce, which is combined with that of other farmers, you may only charge the price agreed for the produce without the flat rate addition.

In these cases, the buyer should pay the farmers’ group only the price agreed for the produce, without the flat rate addition. The farmers’ group will pay the flat rate addition to those farmers who have a certificate, when the proceeds of the sale are shared out. The farmers’ group will be able to reclaim this addition on their own VAT return, as though it were input tax.

8.2 Rules for auctioneers’ sales

If you are using the Auctioneers’ Scheme or the Margin Scheme and acting in your own name, you are regarded as a principal for VAT purposes, buying and selling the goods. In this case, flat rate farmers will be able to charge you the flat rate addition. You will be able to reclaim it on your VAT return. The sale will be subject to the normal VAT rules.

If you are not using either of these schemes and you are not acting in your own name, you will not be regarded as purchasing and selling the goods for VAT purposes. In this case, the flat rate farmer will not be able to charge you, the auctioneer, the flat rate addition. However, the farmer will be able to charge the flat rate addition to the eventual buyer of the goods if the buyer is VAT registered.

9. Notifying changes in circumstances

9.1 When to tell HMRC about any changes

Write to HMRC with any variation to your certificate.

You must notify us if you:

(a) change your name or address

(b) are in partnership and a partner joins or leaves the business, by providing the full name of the partner concerned. If a partner leaves to run another farming business and a new certificate is required in respect of the new business, a fresh application must be made.

(c) are a sole proprietor who takes on a partner, by providing the full name of your new partner.

In these cases we will reissue your certificate with the same number.

In all other cases where the legal entity changes, the existing certificate must be cancelled, but the new entity may apply for a new certificate.

10. VAT 98 - Flat Rate Scheme for Agriculture - Application for Certification

This is the VAT 98. The first page of this Form is published by the Commissioners under Regulation 204(c) of the VAT Regulations 1995. It is the form which must be completed if a business wants to apply to join the scheme.

VAT 98 - Flat Rate Scheme for agriculture - application for certification

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Published 18 October 2012